Inventory Financing

inventory financing

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Table of Contents

    Key Takeaways

    • Inventory financing uses your company’s unsold inventory as collateral for the loan. The amount of money you can borrow depends on your industry, type of inventory, and inventory churn.
    • The most common types of inventory used are raw materials, works in progress (WIP), and finished goods.
    • The more liquid your inventory, the higher your loan-to-value ratio. This means that the easier it is for lenders to sell your inventory, the higher its value. Raw materials are one of the easiest to liquidate, making them an appealing form of inventory for financial institutions

    What is Inventory Financing?

    Inventory financing lets you leverage existing inventory to secure additional working capital. It’s often used by companies with large quantities of inventory, like wholesalers, retailers, construction, etc.

    Like a typical small business loan, inventory financing gives small businesses a lump sum of money upfront. In exchange, they pledge their business’ inventory as security. If they default on the loan, lenders can repossess the assets to cover the losses.

    The amount of money you can qualify for is primarily based on the percentage of the total inventory value to be put up as collateral, and this depends on the following factors:

    • Your industry
    • Type of inventory used as collateral
    • Inventory churn

    You can use the funds for almost any business purpose, including preparing for the peak season, expanding product lines, or unlocking capital tied to unsold or unused inventory.


    Loan Amounts

    $25,000 – $10,000,000+



    Starting at 7.25%



    24 - 48 Hours

    2 Types of Inventory Financing

    Inventory Term Loans

    Like a business term loan, you’ll receive a lump sum of money that you need to repay, with interest, following the repayment schedule set by your lender (weekly, bimonthly, or monthly basis).

    Inventory Line of Credit

    With an inventory line of credit, lenders give you a credit line instead of a lump sum of money. You can withdraw money from it as needed and repay the draws with interest within the specified time frame.

    Ready to apply for Inventory Financing?

    Types of Businesses Benefit from Inventory Financing?

    You can apply for inventory financing if you have large quantities of inventory to put up as collateral. Here are some of the industries that benefit the most from this:

    • Food and beverage
    • Retailers
    • Wholesalers
    • Ecommerce

    The Types of Inventory Used

    The most common types of inventory are raw materials, works in progress (WIP), and finished goods.

    These types of inventory have value, but for lenders, some are more valuable than others. The rule of thumb is that the more liquid your inventory is, the higher your loan-to-value (LTV) ratio. Lenders will sell the inventory you placed as collateral if you cannot repay the loan. The easier it is for them to sell it, the higher its value.

    Raw materials are generally very easy to liquidate, making this type of collateral an appealing inventory for both banks and online lenders. As long as there is a market for the sale of the inventory products, finished goods inventory is ideal.

    However, work in progress or WIP inventory is usually less valuable to lenders. They’re often sold for just the melt-down or material value of the products, which could be valued at only pennies on the dollar, depending on the type of product.

    How Does Inventory Financing Work?

    Your lender will conduct field audits and inventory valuations as a part of the funding process. This process determines the final approval and loan amount of your inventory loan or line of credit.

    During the field audit, the lender will visit the location of the inventory to evaluate the value of the collateral used to secure the funds. This audit will determine how much money you can borrow against your inventory. This is usually based on how much they could sell the inventory in case of a default.

    After the reports are received, and the final approval is issued, you may be able to borrow up to 80% of the appraised value of the inventory.

    You will receive a term sheet that outlines the inventory loan amount, the advance rate, the interest rate, and other associated fees. If you accept the terms and sign the sheet, you will need to make a deposit for the field audit and diligence.


    You can get $25,000 to $10,000,000, and you’ll receive the money within 24 to 48 hours after approval.

    Ready to apply for Inventory Financing?

    The Advantages of Inventory Financing?

    The Disadvantages of Inventory Financing?

    Ready to apply for Inventory Financing?

    What are the Rates and Fees for Inventory Financing?

    At SMB Compass, our rates start at 7.25%.

    Lenders usually determine the rates and fees of the loan depending on the following factors:

    • Profitability
    • Cash flow
    • Business and personal credit
    • Tax and lien history
    • Inventory churn
    • Inventory quality
    • Diversity of customer base

    Ready to apply for Inventory Financing?

    Are You Eligible for Inventory Financing?

    The eligibility requirements may vary from lender to lender. But generally, your business should meet the following requirements to qualify:

    Sales history

    One of the factors lenders consider is your business’ previous financial and inventory records. To expedite the underwriting process, we recommend you prepare a comprehensive sales history report, including inventory turnover, sales projections, and profitability. Your sales history shows lenders your capacity to repay the inventory loan.

    At least a year in business

    The longer you’re in business, the higher your chances for approval because lenders will be able to see a more comprehensive sales history. If you’re running a start-up, it’s best to look for other ways to secure funding.

    Provide a detailed inventory system

    Lenders will want to know more about your inventory management system, particularly inventory control and movement. Prepare a detailed report outlining the shipping and product returns, sale order receipts, and other factors concerning monitoring your merchandise.

    Ready to apply for Inventory Financing?

    Is Inventory Financing the Right Option for Your Business?

    Inventory financing is a great option if you’re a product-based business with a strong sales record. You prefer to put up your inventory as collateral rather than other business or personal assets. Aside from that, you’re also comfortable with lenders auditing your products and monitoring inventory churn.

    Types of Documents Needed to Apply for Inventory Financing

    You’ll need the following documents to apply for inventory loans at SMB Compass:

    Note that we may ask for additional documents, such as profit and loss statements, balance sheets, A/R and A/P aging reports, inventory reports, and more. Our financial experts will advise you on the documents you need to submit.

    How to Apply for Inventory Financing

    It’s super easy! Here’s how:


    1. Fill out our online form. The application is free, and it won’t hurt your credit score—zero commitment.
    2. Once we’ve reviewed your application, our financial advisor will reach out to you to discuss your options.
    3. Receive offers from our lending partners and fund your business.


    Other Financing Options to Check Out

    If you’re still on the fence about inventory financing, here are some alternatives you should check out:

    Invoice Financing

    Invoice financing is an excellent option for companies in the B2B landscape experiencing cash flow gaps due to unpaid invoices. This type of financing, called accounts receivable financing, allows you to receive working capital upfront by using your invoices as collateral.


    Lenders usually advance 80% to 90% of the total invoice value, and you’ll receive the remaining percentage (minus fees) once your customers pay their balances. With invoice financing, you don’t have to wait for months to receive invoice payments.

    Short-Term Loans

    A short-term loan is, as its name suggests – a term loan with shorter repayment terms. Instead of the usual one to two years, these loans have terms as short as two to three months. It’s best for short-term expenses but can also be used for any business purpose.


    With short repayment terms, businesses with poor credit may have a better chance of approval. Many online lenders offer short-term loans, making it great option for small businesses that need fast cash.

    Purchase Order (PO) Financing

    PO financing gives you the working capital needed to pay your suppliers and fulfill large customer orders. The lender will pay your suppliers directly to manufacture and deliver the goods to your customers. Your customers will pay their dues to the lender, who will deduct a small fee before sending the money to you.


    PO financing ensures you don’t have to turn down large customer orders. However, this only applies to companies that sell completed products, so businesses that sell services or materials cannot qualify.

    Business Lines of Credit

    A business line of credit is a flexible financing solution that provides easily accessible capital. You’ll receive a line of credit from lenders, and you can withdraw from it anytime, given that you don’t exceed the limit. You only have to repay the amount you’ve withdrawn, plus interest. This versatility is beneficial for small businesses, especially since they could use the funds for any business need.

    Ready to apply for Inventory Financing?

    Apply for Inventory Financing Today!

    If you apply through an online lender like SMB Compass, we’ll send your application to several lenders so you can choose which one works best for your business.


    The lenders we work with are more lenient than most traditional financial institutions, opening up more financing opportunities for small businesses.


    Give us a call today at 888-853-8922 or send us an email at